Tag: SAP

‘You bought what? For how much?’

Brenon Daly

Contact: Brenon Daly

In both of the largest enterprise IT acquisitions so far this year, the deals are not what they seem. Or more accurately, the target companies were not acquired for what they are. What do we mean? Well, we would posit that Intel didn’t buy McAfee for its core security applications any more than SAP scooped up Sybase for its core database product. Instead, in each case, the buyers really only wanted a small part of the business but found themselves nonetheless writing multibillion-dollar checks for a whole company.

For SAP, the apps giant really wanted Sybase’s mobile technology, essentially using the Sybase Unwired Platform to ‘mobilize’ all of its offerings. It’s nice that the purchase also brought along some data-management capabilities, particularly some pretty slick in-memory database technology. But for SAP, this deal was all about getting its apps onto mobile devices. However, Sybase’s mobile business only generated about one-third of total revenue at the company. So SAP ends up handing over $5.8bn in cash for a business that’s currently running at just $400m.

If anything, Intel is paying even more for the business that it truly wanted – or, at least, the business that’s most relevant – at McAfee: embedded security. Yet that’s only a small (undisclosed) portion of the roughly $2bn revenue at McAfee, the largest stand-alone security vendor. Tellingly, Intel plans to operate as a kind of holding company, letting McAfee continue undisturbed with its business of selling security applications to businesses and consumers.

What’s new at Novell?

Brenon Daly2 Comments

Contact: Brenon Daly

Even though its shareholders aren’t overwhelmingly concerned with Novell’s financial numbers right now, the company will nonetheless be releasing results for its fiscal second quarter later Thursday afternoon. For what it’s worth, Wall Street expects earnings of about $0.07 per share on sales of $205m, representing year-over-year declines on both the top and bottom lines. (We should add that if Novell does manage to hit expectations, it will snap two straight quarters of earnings whiffs.)

But then Novell hasn’t traded on fundamentals for the past three months, ever since hedge fund Elliott Associates launched an unsolicited offer for the company. Novell, which is being advised by JP Morgan Securities, stiffed the bid, but did leave the door open to other ‘alternatives to enhance shareholder value.’ Since Elliott floated the offer, shares of Novell have basically changed hands at or above the $5.75-per-share bid.

As a decidedly mixed bag of businesses, Novell isn’t the cleanest match for any other company that might want to take it home. For that reason, most speculation around a possible buyer for Novell has centered on private equity firms. (The buyout shops are undoubtedly licking their chops at the prospect of picking up Novell’s $600m of maintenance and subscription revenue, not to mention the $1bn that sits in the company’s treasury.) However, we understand from a person familiar with the process that there are a handful of strategic buyers still interested in Novell.

If we were to put forward one potential suitor that could probably benefit more than any other company in picking up Novell’s broad portfolio of businesses, we might single out SAP. OK, we know it’ll never happen. (Never, ever.) But a hypothetical pairing certainly does go a long way toward filling a few notable gaps in SAP’s offering, while also making the German giant far more competitive with Oracle.

Consider this fact: some 70% of SAP apps that run on Linux run on Novell’s SUSE Linux Enterprise. Add in Novell’s additional technology around identity and access management, systems management, virtualization and other areas, and SAP’s stack suddenly looks a lot more competitive with Oracle’s stack. Again, an SAP-Novell deal will never happen, but the combination certainly does lend itself to some intriguing speculation.

Timeline: Novell in the crosshairs

Date Event Comment
March 2, 2010 Elliott Associates launches unsolicited bid of $5.75 per share for Novell The offer values Novell at a $2bn equity value but only a $1bn enterprise value
March 20, 2010 Novell rejects Elliott’s bid as ‘inadequate’ By our calculation, Elliott is valuing Novell at just 1.6 times its maintenance/subscription revenue

Source: The 451 Group

The German giant’s gamble

Brenon Daly

Contact: Brenon Daly

In the largest software transaction in more than two years, SAP plans to pick up mobility software and database vendor Sybase for a net cost of $5.8bn. SAP’s all-cash bid of $65 per share represents a 44% premium over the three-month average closing price for Sybase. More dramatically, SAP’s offer represents the highest price for Sybase stock in the target’s two decades as a public company.

The purchase, which is expected to close in July, represents a big bet by the German giant on the future of mobile applications. The two companies have partnered for more than a year, with SAP offering mobile CRM and Business Suite applications on Sybase’s Unwired Platform. Currently, mobile products account for one-third of revenue at Sybase, which started life as a database vendor. Within the database segment, Sybase also has an analytic database (Sybase IQ) that has been generating most of the growth in recent years.

At an enterprise value of $5.8bn, SAP is valuing Sybase at basically 5 times sales. (Sybase generated revenue of $1.1bn in 2009 and recently guided Wall Street to expect about 6% sales growth this year.) That’s roughly in line with the multiple SAP paid in its other large deal, the $6.8bn acquisition of Business Objects in October 2007. It’s not out of whack with SAP’s own valuation. The company trades at about 4 times sales, and that’s before any acquisition premium is figured in. Viewed another way, SAP trades at roughly 14 times cash flow, while it is paying 15 times cash flow for Sybase.

ECM: And then there was one…

Brenon Daly

Contact: Brenon Daly

With the US government having blessed on Friday the pending marriage between Open Text and Vignette, the only remaining obstacle in the $310m pairing is a vote by Vignette shareholders next month. And we expect pretty quick approval of the offer from Vignette’s long-suffering shareholders, who had seen their shares lose half their value in the half-decade preceding Open Text’s move. Over that same period, Open Text stock had gained about 16%, handily outperforming the 15% loss posted by the broader Nasdaq Index. (Share price is important in this transaction because Open Text is paying roughly one-third of the bill for Vignette in equity. Open Text stock is up nearly 10% since the deal announcement.)

If, as expected, Vignette shareholders sign off on the sale in their July 21 vote, the deal would mark the second major enterprise content management (ECM) vendor taken off the board in 2009. In January, Autonomy Corp announced a somewhat unexpected move into ECM by shelling out $775m in cash for Interwoven. That transaction closed in mid-March. The recent pairings continue a trend of major consolidation in the ECM market that started back in 2003, with EMC buying Documentum for $1.8bn. IBM, Oracle and Hewlett-Packard have also announced ECM deals of their own, pushing the announced value of acquisitions in the sector to $9.4bn since January 2002. For those of you keeping score at home, the one notable enterprise software company that hasn’t made an ECM move of its own is SAP. Of course, SAP just happens to be the largest partner for Open Text. So if the German giant does look to make a buy, we have a pretty good idea of who it might call.

IBM-Exeros: the wind-down and the bid-up

Brenon Daly

Contact: Brenon Daly

Even in the ongoing recession, the fundamental economic laws concerning supply and demand still haven’t been overturned. That’s at least one lesson we can draw from the recent sale of the assets of data discovery startup Exeros. Although terms weren’t disclosed, we believe IBM paid about $13m for Exeros. While that hardly seems like a blockbuster exit for a VC-backed startup that raised some $19m, we would note that the price is four times higher than the offer Exeros received from its first bidder.

As we understand the process, SAP offered just $3m for the assets. Exeros gambled and let the ‘no shop’ period expire on SAP’s bid and then successfully enticed IBM. (Big Blue will slot in the Exeros technology alongside a number of other tools in its Information Management portfolio.) One source added that IBM agreed to an earn-out that could take the final price up to $20m, potentially making Exeros’ backers whole on their investment.

Whatever IBM ends up handing over for Exeros, the target should probably consider any amount over SAP’s initial bid a windfall. The last time we spoke with Exeros (in mid-September, just before capitalism as we know it ended), the unprofitable startup said it was looking to raise a third round of funding that would carry it through to break-even status. Of course, we can all imagine how those fundraising conversations must have gone.

So instead of drawing down money, Exeros was wound down. However, the resulting transaction wasn’t like the dozens of scrap sales that we’ve seen in recent months, where a single buyer pushes the price down so low that the startup’s investors get just pennies on the dollar. With both SAP and IBM bidding, Exeros’ backers may well break even. And that’s not a bad return, given what they were facing.

Startup scrap sales

With new funding difficult to come by, many cash-burning startups are finding that they have no choice but to take a scrap sale. Those desperate deals cut M&A spending on VC-backed startups in the second half of 2008 by nearly three-quarters over the same period in 2007. From July to December last year, 100 venture-backed startups got acquired, for a total bill of just $3bn. That compares to 153 startups sold for a total of $11.1bn during the same period in 2007.

And we’ve seen more of these types of deals so far this year. Oracle, SAP, Barracuda Networks and Quest Software, among other large technology buyers, have all purchased companies for less than the money raised by the startups, according to our estimates. Consider the specific case of Mirage Networks. The network access control (NAC) vendor raised some $40m before discovering that NAC wasn’t really a market after all. (The eight-year-old company generated an estimated $5m in sales last year.) Trustwave picked up Mirage for some $10m, we estimate. Meanwhile, Mazu Networks will have to hit all of its earn-outs to make its investors whole again. About a month ago, Riverbed Technology said that it would pay $25m upfront for the network security vendor, with a possible $22m earn-out. That’s actually not a bad outcome for unprofitable Mazu, which we understand was burning about $1m each quarter. And yesterday, Netezza picked up the assets of data-auditing and protection vendor Tizor Systems for $3.1m; Tizor had raised $26m from investors.

VC-backed tech startups M&A

Month 2007 deal volume 2007 deal value 2008 deal volume 2008 deal value
July 23 $2.3bn 21 $994m
August 18 $1.2bn 16 $497m
September 25 $1.7bn 16 $642m
October 39 $2bn 13 $487m
November 27 $3.1bn 20 $346m
December 21 $788m 14 $56m
Total 153 $11.1bn 100 $3bn

Source: The 451 M&A KnowledgeBase

SAP goes (Cog)head hunting

Brenon Daly

Contact: Brenon Daly

Having put a bit of money into Coghead about two years ago through its venture wing, SAP picked up all of the platform-as-a-service vendor in a wind-down sale late last week. Coghead drew in $11m in two rounds from backers El Dorado Ventures, American Capital Strategies and SAP Ventures. American Capital and SAP Ventures joined in Coghead’s last round, raised in April 2007, which came a little more than a year after El Dorado provided a $3.2m first round.

We had heard late last year that Coghead, originally known as Versai Technology, was trying to land another round. However, like so many other startups these days, the company wasn’t having success in raising new capital. Indeed, earlier this month, my colleague Dennis Callaghan noted that Coghead had been quiet for several months. He speculated that the company might fit well into the portfolio of open source business process management vendor Intalio. Coghead actually embedded Intalio’s process engine, and the two startups share SAP Ventures as a backer. (Overall, SAP Ventures has some 38 active investments.)

Instead of landing with Intalio, the Coghead assets are headed to SAP. And what will the German giant do with them? While much of the speculation has portrayed the purchase as SAP buying its way into the cloud, a more tangible indication is the ‘situational applications’ that Coghead announced at last summer’s SAP conference, Sapphire. With Coghead’s technology, users could build and manage applications that integrate with SAP. Given SAP’s proprietary language and platform, allowing customers to build applications or Web front-ends to those applications could go some distance toward getting SAP a return on its investment.

Is Open Text open for a deal?

Brenon Daly

Contact: Brenon Daly, Kathleen Reidy

If Autonomy Corp’s $775m purchase last week of Interwoven came out of left field, we suspect the next major enterprise content management (ECM) deal will bring together a buyer and seller much more familiar with each other. As it stands now, Open Text is kingpin of the stand-alone ECM vendors. (The market capitalization of the Canadian company is almost 10 times larger than that of poor old Vignette, which we heard in the past was on the block.) Open Text is slated to report its fiscal second-quarter results Wednesday afternoon.

Most of the big software vendors have already done their ECM shopping, starting with EMC’s purchase of Documentum more than a half-decade ago. More recently, IBM and Oracle made significant purchases. And now we can add Autonomy to the list of shoppers, despite the company having downplayed the importance of content management in the past. (Apparently, it was important enough to Autonomy for it to ink the third-largest ECM deal.)

So who might be eyeing Open Text, which currently sports an enterprise value of $1.7bn? The obvious answer – and one that’s been around for some time now – is SAP. The German giant is Open Text’s largest partner, reselling four different products. Competitively, we don’t see Autonomy’s purchase of Interwoven affecting business much at Open Text, much less acting as a catalyst for any deal with SAP. (With its focus on the legal market, Interwoven only really bumped into the Hummingbird products that Open Text picked up when it bought the fellow Canadian company in mid-2006.) Still, SAP has already made one multibillion-dollar move to consolidate the software industry, acquiring Business Objects for $6.8bn in October 2007. If it looks to make another Oracle-style play, we guess Open Text would be at the top of the list.

Largest ECM deals

Date Acquirer Target Price EV/TTM sales multiple
October 2003 EMC Documentum $1.8bn 6x
August 2006 IBM FileNet $1.6bn 2.6x
January 2009 Autonomy Corp Interwoven $775m 2.8x
August 2006 Open Text Hummingbird $489m 1.6x
November 2006 Oracle Stellent $440m 2.9x

Source: The 451 M&A KnowledgeBase

Salesforce.com’s service play

Brenon Daly

Contact: Brenon Daly

Heading into Thursday‘s luncheon hosted by Salesforce.com, there was a fair amount of speculation that the software-as-a-service (SaaS) stalwart would be using the event to announce a new acquisition. The company employed the same setup to disclose its purchase of tiny content management startup Koral in April 2007. The rumors turned out to be off the mark a bit, as the luncheon instead focused on Salesforce.com’s rollout of a new customer service offering. There is a link to M&A, however. The offering unveiled, Service Cloud, got a substantial boost when the company picked up privately held InStranet last August.

InStranet stands as Salesforce.com’s largest acquisition in its 10-year history, but one insider told us the deal almost didn’t happen. Salesforce.com paid $31.5m for InStranet, which we understand was about twice the amount of sales the French company booked in the year leading up to the transaction. But Salesforce.com wasn’t the first bidder for InStranet, according to one source. SAP had moved pretty far along during M&A discussions with InStranet before Salesforce.com entered the picture. Marc Benioff’s buyers buttoned up the purchase in just three months, the source added.

And then there were five: Salesforce.com’s acquisition history

Announced Target Deal value Target description
August 2008 InStranet $31.5m Customer service automation
October 2007 CrispyNews Not disclosed Community news, website development
April 2007 Koral $7m* Web content management
August 2006 Kieden Not disclosed Search engine marketing management
April 2006 Sendia $15m Wireless application developer

Source: The 451 M&A KnowledgeBase *451 Group estimate

Hey, big spender?

Brenon Daly

Contact: Brenon Daly

Given all the economic uncertainty, companies have made it clear that they’re not in the market for any big deals. (In our annual survey of corporate development officials, they indicated that they were least likely to pursue ‘transformative’ deals in 2009.) To put some numbers around that sentiment, we contrasted the shopping tab of four well-known tech companies in 2008 with the previous year’s tally.

The quartet we selected (IBM, SAP, Microsoft and Nokia) all announced the largest deals in their respective histories in 2007 so we naturally expected some drop-off in spending. But we were amazed at the steepness of the plunge. In 2007, the four companies announced 40 transactions with an aggregate value of $29.2bn. Last year, that dropped to 34 deals worth a paltry $4.7bn. (In fact, each of the firms inked a single transaction in 2007 that was worth more than 2008’s collective total.) And it’s not like they don’t have the resources to continue shopping. Over the past four quarters, IBM, SAP, Microsoft and Nokia have collectively generated an astounding $45bn in cash-flow operations.